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Personal Finance: High earners are going to hate these retirement proposals

For two years, a commission of 19 high-profile people from the academic, political, business, and investment worlds has been busy devising a bipartisan plan to strengthen the retirement security and personal savings of Americans. The result, a comprehensive 146-page report from the Bipartisan Policy Center packed with ideas, came out Thursday.

A lot of high earners are going to hate it.

One of the reports many proposals would raise the taxable level of Social Security earnings to $195,000 from the current $118,500 by 2020, part of a broader plan to renew the promise of a comfortable retirement, across the income spectrum, for current and future generations of Americans.

The report also includes revamps of 401(k) plans, reverse mortgages and tax credits that encourage savings. It recommends that any company with at least 50 employees that doesnt offer a retirement plan meeting certain standards would have to enroll workers in a new type of savings plan proposed in the report or in an enhanced myRA that the report envisions.

Growing inequality has made retirement increasingly available to only a few. We need a federal plan that serves everyone, one of the commission members, author and New School economist Teresa Ghilarducci, said in a statement. With 27 states actively pursuing retirement reform, these leaders have made it clear that the political will for change exists.

The report addresses an urgent need:

#x2022;Nearly half of respondents in the Federal Reserves 2014 household survey said they wouldnt even be able to cover a $400 financial emergency without selling something or borrowing money, never mind saving for retirement.

#x2022;Employer defined-benefit retirement programs have largely been replaced by defined-contribution plans such as 401(k)s that employees have to finance and manage mostly by themselves, and only half of private-sector workers with access to these plans use them.

#x2022;That makes Social Security the main source of retirement income for many older Americans. And as anyone who has given retirement a passing thought knows, the program has big challenges.

If the Bipartisan Policy Center reports recommended policies are enacted, retirement savings for middle-class Americans would be increased by about 50 percent by 2065, and old-age poverty reduced by one-third from todays levels, commission co-chair Kent Conrad, a former Democratic senator from North Dakota, said in a press briefing.

Here are some of the proposals that would affect high-income workers:

#x2022;Limit tax-deductibility of mortgage interest. The federal tax deduction for mortgage interest payments usually applies to taxpayers who itemize. These are typically wealthier taxpayers, but the reports authors are concerned about Americans debt, including the increasing level of mortgage debt among older people. In general, borrowing against the equity in your home before retirement is likely a poor choice for many homeowners, as doing so can lead to greater debt and related expenses during retirement, when income is typically lower.

The recommendation: Tax deductions should no longer apply to mortgage interest when home equity decreases, such as through HELOCS (home equity lines of credit), mortgage debt for second homes, second mortgages that reduce home equity, and refinancing transactions. That would give homeowners more incentive to store up home equity to draw on in retirement and boost retirement security for the many households that are home-rich, cash poor, the authors say.

#x2022;Shrink Social Security benefits for the wealthy. Along with taxing more income for Social Security, more taxation of Social Security benefits, and a 0.5 percent hike in the employee (and employer) payroll tax, spousal benefits would be capped. Today, with a significant majority of working-age women working outside the home, wives of men with high incomes are less likely to work than women in less-affluent households, the report says. So the spousal benefit mostly benefits certain high-income families who can afford to have only one earner, and, in this way, undermines the progressivity of Social Security.

The way it works now, as long as a marriage has lasted at least 10 years, a married or divorced person can draw on his or her own benefits or the spouses benefits, whichever is higher. The recommendation is to cap the spousal benefit at a level equal to the spousal benefit received by someone married to a worker in the 75th percentile of the earnings distribution. In 2022, the new maximum would be $843 a month.

Under current rules, the maximum monthly benefit in 2016 is $2,639, and the maximum spousal benefit based on that is $1,320, according to the Social Security press office.

#x2022;Cap total assets in tax-advantaged savings accounts. The Government Accountability Office estimates that 314 taxpayers have more than $25 million in IRAs, 791 have between $10 million and $25 million in IRAs, and 7,952 have between $5 million and $10 million in IRAs, according to the report. That might result from investing IRA assets in shares of an early-stage startup before it goes public, the report notes.

#x2022;Close the stretch IRA estate-planning loophole. Non-spousal beneficiaries such as children and grandchildren are able to keep money they inherited in IRAs and defined-contribution plans in tax-advantaged accounts for decades, the report notes. It recommends that those assets be distributed over no more than five years.